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FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management

A firm's risk report shows that losses from a rogue employee's unauthorized trades, a payment system outage, and a lawsuit over inadequate disclosure all occurred in the same quarter. Under standard risk classification, how should these losses primarily be categorized?

These losses are primarily operational risk, which covers losses from failed or inadequate internal processes, people, systems, or external events. Unauthorized trading, system outages and litigation over disclosure fit that definition, rather than market risk from price moves or credit risk from counterparty default.

  1. AMarket risk
  2. BCredit risk
  3. COperational riskCorrect
  4. DSystematic risk

Explanation

Operational risk is the risk of loss from inadequate or failed internal processes, people and systems, or from external events; it includes fraud, system failures and legal events. None of these losses stems mainly from price changes or counterparty default.

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